Cost update Q4 2016

The fall in the value of sterling has caused building costs and consumer prices to rise, while manufacturing input has taken a hard hit in the last year. Michael Hubbard of Aecom reports

01 / Key changes

Percentage change year-on-year (Q4 2015 to Q4 2016)

(Q4 2016 figures are provisional)

Building cost index

A composite measure of building costs increased over the last 12 months by 2.6% at Q4 2016. Materials cost inflation increased notably over the period, resulting from a combination of sterling depreciation and new year price increases. Labour costs continue to rise solidly.

Mechanical cost index

The rate of annual change increased to 3.3% at Q4 2016, falling slightly from 3.4% in the preceding quarter. Notably, rates of annual change for materials have overtaken those for labour.

Electrical cost index

The electrical cost index increased by 3% over the year. Similarly to the mechanical cost index, materials inflation trends are higher than those for labour on an annual basis.

Consumer prices index

Consumer price inflation continued to pick up pace in the final quarter of 2016. Growing domestic inflationary pressures have resulted from a significant fall in the value of sterling.

The following chart shows Aecom’s index series since 2005, reflecting cost movements in different sectors of the construction industry and consumer prices.

Aecom indices

02 / Price adjustment formulae for construction contracts

Price Adjustment Formulae indices, compiled by the Building Cost Information Service (previously by the Department for Business, Innovation and Skills), are designed for the calculation of increased costs on fluctuating or variation of price contracts. They provide guidance on cost changes in various trades and industry sectors and on the differential movement of work sections in Spon’s price books.

The 60 building work categories recorded an average increase of 5.4% on a yearly basis. The highest increases were recorded in the following categories:

Price adjustment formulae

The lowest yearly increases were in these groups:

Price adjustment formulae

Materials

03 / Summary

04 / Key indicators

Construction industry

The All Work material price index increased by 3.7% in the year to December 2016. Housing-related materials increased by 3.6% over the same period. Non-housing materials prices also increased, by 3.4% annually. All M&E categories posted significant annual increases.

Construction materials

*provisional

*provisional

Data sources: ONS and BEIS

UK economy

Consumer price inflation rose over the year by 1.8% in January. Inflation reached its highest rate since June 2014, as inflationary pressures built from the fall in sterling against its major currency pairs. Rising raw materials costs are a major contributor to these increases. Further upward pressure on the headline annual rate of inflation is expected through 2017.

Source: ONS

Input prices increased by 20.5% on a yearly basis up to January 2017. This is the fastest rate of annual increase since Q3 2008. It also marks the seventh consecutive month of increases annually. The effects of weaker sterling experienced through 2016 are now beginning to be felt, raising sterling prices of imports. Additionally, the price for oil has stabilised at over $50/barrel (£41/barrel), which adds weight to overall input cost trends.

Source: ONS

Factory gate prices increased 3.5% on a yearly basis in January. This is the largest annual increase since January 2012 and marks the high point so far of a trend established in the middle of last year. A mixture of higher input costs, a stronger labour market and increased confidence among manufacturers to pass on higher prices to consumers contributed to recent changes.

Metal prices

Source: LME

Source: LME

Yearly price increases for metal commodities accelerated at the end of 2016 and into 2017. A number of factors have played a part in the upward movement of prices: expectations of significant infrastructure expenditure in the US, successful efforts to address production over-capacity and apparent optimism on the prospects for the global economy.

Exchange rates

Following sterling’s significant falls immediately after the EU referendum outcome, the currency has rallied a little against the euro and the US dollar. That said, it remains below long-run averages for both currencies. Prevailing uncertainty in the UK and elsewhere in the world leads to continuing fluctuations in the direction of sterling. This is likely to carry on while largely political issues around Brexit remain unresolved or under negotiation.

Labour

05 / Labour market statistics

06 / Wage agreements

Construction Industry Joint Council

Following negotiations between the parties to CIJC, the council has agreed a two-year agreement on pay and other conditions. Hourly pay rates increased by 2.5% from 25 July 2016 and will then rise by a further 2.8% in June 2017. Industry sick pay and subsistence allowance will also increase in line with the basic pay rate increases. Workers will receive an extra day’s holiday from 1 January 2017, which is worth an additional 0.4%. For more details on apprentice rates, daily fare and travelling allowance and other rates refer to CIJC document IR.2016.19.

Joint Council Committee of the Heating, Ventilating and Domestic Engineering Industry

A two-phase agreement has been agreed between BESA and Unite trade unions. Phase 1 includes 2% and 2.5% increases in the hourly wage rate effective from 3 October 2016 and 2 October 2017 respectively. Phase 2 covers the periods 2018/2019 and 2019/2020, involving increases in index and other benefits agreed in July 2016. Discussions on the 2018 and 2019 hourly wage rate will take place towards the end of 2016. The introduction of calculating daily fare and travel allowances has been changed from kilometres to miles. Workers’ annual holiday is to increase from 23 to 24 days effective from February 2020. For more information on the agreement, refer to JCC letter 117 of BESA.

The Joint Industry Board for the Electrical Contracting Industry

The electrical contracting industry has agreed a four-year wage deal, effective from January 2017. Hourly wage increases of 2% in 2017, 2.5% in 2018, 2.75% in 2019 and 3% in 2020. Introduction of a new mileage allowance and rate to replace travel allowance and travel time also comes into effect. Annual holidays increase to 23 days in 2019 and 24 days in 2020. For more information on the agreement, refer to the electricals’ and Unite wage agreement document – July 2016.

Building and Allied Trades Joint Industry Council (BATJIC)

The Building and Allied Trades Joint Industrial Council (BATJIC) agreed a two-year pay deal effective from 27 June 2016. Workers will receive a 2.5% pay rise this year and a further 2.5% increase in 2017. Lower paid operatives will get a bigger boost of 4% this year, followed by 2.5% next year. The agreement includes a commitment that if inflation in early 2017 is higher than 2.5%, then the 2017 pay rise will match this up to a limit of 3%.

The Joint Industry Board for Plumbing, Mechanical Engineering Services in England and Wales

A 2.5% increase in hourly rates came into effect from 4 January 2016. Employees’ rates of pay, allowances entitlements and benefits are published in promulgation No. 171 of JIB for Plumbing, Mechanical Engineering Services in England and Wales agreement.

The BATJIC rates of wages effective from 27 June 2016 are:

Guide to data

Aecom’s cost indices track movements in the input costs of construction work in various sectors, incorporating national wage agreements and changes in materials prices as measured by government index series.

They are intended to provide an underlying indication of price changes and differential movements in the various work sectors but do not reflect changes in market conditions affecting profit and overheads provisions, site wage rates, bonuses or materials’ price discounts/premiums. Market conditions and commentary are outlined in Aecom’s quarterly Market Forecast (last published February 2017).

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